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Non-Compete History

At early common law, restraints on future employment were illegal per se. In the 15th and 16th Centuries in England, the economy relied heavily on the apprenticeship, whereby guilds (essentially association of craftsmen and workers) provided craftsmen with workers and workers with a career path. Guilds consisted of three basic groups: The masters, the journeymen, and the apprentices. A master and the journeyman would enter a contract whereby the master provided training in exchange for low wage labor (generally) for 7 years.

At the end of the period, the apprentice graduated to become a journeyman. Of course, the master would prefer the additional advantage of being able to prevent the journeyman from competing against in his community, and attempted to enforce non-competition agreements to force the journeymen to go to another town to practice his craft. Courts simply would not enforce these agreements.

Dyer’s Case is one of the earliest known cases dealing with non-competes. It dates to approximately the early 1400s, but there is no reported decision in the case. In 1587, in the case of Blacksmiths of South-Mims, the plaintiff blacksmith was thrown in jail for trying to enforce a non-compete against another blacksmith. In 1614, a court ruled that “at common law, no man could be prohibited from working in any lawful trade.” These cases reveal a clear rule that reflected the economic realities of the times.

The “Black Death” plague had caused labor shortages in the mid-14th century. So, much so that being unemployed was illegal for anyone under 60 years of age, and agreements which restrained someone from being employed were likewise illegal. These labor shortages combined with an economy reliant on the guild system were the driving force behind hundreds of years precedent which refused enforcement of non-competes. Common law evolves and adapts to the economic environment, and the early common law of non-competes is a good example of this reality.

The first shift apparently occurred in 1711 with a English Court’s decision in Mitchell v. Reynolds. The Court restated that restraints on trade were illegal, but recognized that partial restraints on trade under certain circumstances might be enforceable.

The partial restraint on trade meme made it to American shores sometime later, but seems to be spreading by mid-19th century. The spread of the partial restraint on trade meme can be attributed to the changes in the economy. Although competition and free movement of labor prevailed were still recognized as important to the functioning of our economy, as the economy shifted to a more capitalist model, courts began to shift their emphasis to the freedom of contract. In the first half of the 19th Century (1830-1840) cases begin to articulate “reasonableness” considerations for restraints on trade, although a vast majority of courts still were inclined toward the early common law’s refusal to enforce. However, as capital began to organize into large, powerful interests, it was just a matter of time until the exception swallowed the rule.

In 1889, the South Carolina Supreme Court first enunciated a standard for evaluating restraints on trade and partial restraints on trade in Carroll v. Giles, 30 S.C. 412, 9 S.E. 422 (S.C. 1889). (This is the first S.C. case that I have found on Westlaw dealing with the subject). The Court stated the standard as follows (quoting another source): “It has been the policy of the law to promote the freedom of engaging in and carrying on all kinds of business which are beneficial to the public. *** Contracts in general restraint of trade, whatever be their form, or the nature and immediate object of their stipulations, are void. *** On the other hand, contracts in partial restraint of trade are valid. To this end they must be partial with respect to the territory included; reasonable with respect to the amount of territory, the circumstances and rights of the party burdened, and the one benefited by the restriction, and the number and interests of the public, whose freedom of trading is circumscribed; and made upon a valuable and sufficient consideration.” The court did not mention limited in time, but otherwise, this standard is more or less the present standard.

Thus, by the beginning of the 20th Century, most American courts were beginning to apply general contract principles and a “reasonableness” standard was developed to evaluate the enforceability non-competes. It is interesting to note that during this period of history, Congress passed the Sherman Anti-Trust Act, which prohibited restraints on trade. Although seemingly applicable to post-employment non-competes, the Sherman Act was rarely used to challenge these non-competes. Also interesting, is the fact that a “rule of reason” developed by courts applying the Sherman Act.

Over the last 50 years, as the economy continue to evolve so did the law of non-competes. And even though the nominal standard of evaluating non-competes has not changed much over the last 100 years, the way in which the standard is applied has. Although the “disfavor of non-competes” is still given lip service, it is clear that judges are much more open to enforcement.

One change in the economic environment from the days of the early common law is that the American economy has had an excess of labor (generically speaking, since certain high level skills are always in demand) over the last 75 years. Capital is much more organized than it was 150 years ago. Relatedly, the political influence of organized labor has eroded in favor of a “pro-business lobby” which cannot be ignored in the evolution of the law of non-competes.

Moreover, and perhaps as important as anything, has been the shift from an industrial and manufacturing economy to a service and knowledge economy. A change in the understanding of human capital and ownership of intellectual property have contributed to a willingness to enforce restrictions on employees who “know too much.” Trade secrets are quickly becoming the linchpin to non-compete analysis as any other concept in law.

My primary source for further reading: The Law and Economics of Post-Employment Covenants: A Unified Framework 11 Geo. Mason L. Rev. 357 (2002); Williston on Contracts, section 13.4. Malsberger, Covenants Not to Compete, A State by State Survey (2008).